Income Tax Appellate Tribunal - Panji
Deputy Commissioner Of Income-Tax,, vs M/S. Ranadey Micronutrients Pvt. ... on 18 October, 2017
आयकर अपीलीय अिधकरण,
अिधकरण पुणे यायपीठ "बी
बी"
बी पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
ी डी.
डी क णाकरा राव , लेखा सद य
एवं ी िवकास अव थी,
अव थी याियक सद य के सम
BEFORE SHRI D.KARUNAKARA RAO, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA No.137/PUN/2015
िनधा रण वष / Assessment Year : 2010-11
M/s. Ranadey Micronutrients Pvt. Ltd.,
Shrikrishna, Krishnakeval Township,
Kondhwa Khurd, Pune - 411 048
PAN : AAACR8134R .... अपीलाथ /Appellant
Vs.
ACIT, Circle-6, Pune .... यथ / Respondent
आयकर अपील सं. / ITA No.217/PUN/2015
िनधा रण वष / Assessment Year : 2010-11
DCIT, Circle-5, Pune .... अपीलाथ /Appellant
Vs.
M/s. Ranadey Micronutrients Pvt. Ltd.,
Shrikrishna, Krishnakeval Township,
Kondhwa Khurd, Pune - 411 048
PAN : AAACR8134R .... यथ / Respondent
Assessee by : Shri Arvind Shonde
Revenue by : Dr. Vivek Aggarwal
सुनवाई क तारीख / घोषणा क तारीख /
Date of Hearing : 11.10.2017 Date of Pronouncement: 18.10.2017
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
These are cross appeals filed by the Assessee and the Revenue against the order of CIT(A)-4, Pune dated 16-12-2014 for the A.Y. 2010-11.
2. Background facts are that the assessee is a Private company and engaged in the business of manufacturing and sale of organic inorganic and micronutrient fertilizers. Assessee filed the original return of income on 29-09-2010 declaring 2 ITA Nos.137 & 217/PUN/2013 M/s.Ranadey Micronutrients Pvt. Ltd., total income of Rs.1,16,41,403/-. In the scrutiny assessment made u/s.143(3) of the Act, the AO determined the assessed income at Rs.2,01,61,000/-. Among many, the AO made addition of Rs.27,79,911/- on account of disallowance u/s.14A of the Act and disallowance of Commission u/s.40A(2)(b)(iv) r.w.s. 36(1)(ii) amounting to Rs.41,33,000/-. AO rejected the assessee's submission that revolves around the settled presumption of making investment out of the interest free funds in the exempt income yielding investments. In the process, the AO strictly followed the computation provided in Rule 8D(2) of the Income Tax Rules, 1962 and disallowed sum of Rs.27,79,911/-. With regard to the disallowance of commission paid to Directors and Employee relatives, the AO analysed the commission paid by the assessee over the previous years and linked it to the turnover/net profits and held the commission paid is excessive and effectively, restricted the commission payment of.
3. During the First Appellate proceedings, on the issue of disallowance of commission, the CIT(A) considered various facts, i.e. Board resolution granting commission as claimed in the return of income, maximum marginal rate of tax paid by the recipients of the commission (company employees) etc. and allowed the claim of the assessee as per the discussion given in Para 6.2.4 of the impugned order. With regard to the disallowance Rs.27,79,911/- u/s.14A, the CIT(A) upheld the computation of the AO and confirmed the addition. Assessee suo moto disallowed an amount of Rs.84,967/- under clause (ii) of Rule 8D(2) of the I.T. Rules, 1962.
4. Aggrieved with the confirmation of the addition by the CIT(A) on account of disallowance of Rs.27,79,911/- u/s.14A r.w. Rule 8D of the Act, the assessee is in appeal before us. Further, aggrieved with the relief granted by the CIT(A) in connection with the payment of commission to the Directors/Employees, the Revenue is in appeal before us with the grounds mentioned hereinunder. 3
ITA Nos.137 & 217/PUN/2013 M/s.Ranadey Micronutrients Pvt. Ltd., ITA No.217/PUN/2015 (By Revenue) :
5. We shall now take up the appeal of the Revenue. Grounds raised by the Revenue read as under :
"1. The order of the Ld.CIT(A) is contrary to law and to the facts and circumstances of the case.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance of expenditure of Rs.41,33,000/- u/s.36(1)(iii) r.w.s. 40A(2)(b)(iv) of the I.T. Act made by the Assessing Officer on account of commission paid to working directors and other employees.
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has failed to appreciate the fact that there was abnormal increase in payment of commission during the current year as compared to preceding year although there was reduction in profit compared to preceding year.
4. For this and such other reasons as may be urged at the time of hearing, the order of the Ld.CIT(A) may be vacated and that of the Assessing Officer be restored.
5. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon'ble Tribunal."
6. From the above, it is evident that the solitary issue raised by the Revenue relates to the relief granted by the CIT(A) with regard to the "payment of commission to the Directors/Employees". In the return of income, the AO noticed that an amount of Rs.60,08,070/- was paid as commission to the Directors and other employees of the company. The said claim was considered higher by the AO considering the fact that the commission paid was only Rs.18.75 lakhs in the preceding year. On doing analysis of the net profit and turnover figures, the AO disallowed the claim to the extent of Rs.4,130/- u/s.36(i)(iii) r.w.s. 40A(2)(b)(iv) of the Act. Some of the commission recipients are covered by the definition of specified persons provided u/s.40A(2)(b) of the Act. Details are given in Para No.6 of the impugned order.
7. Considering the submissions of the assessee, the contents of which are extracted in Para 6.1 of the impugned order, the CIT(A) dismissed the conclusions drawn by the AO and deleted the addition made by the AO. 4
ITA Nos.137 & 217/PUN/2013 M/s.Ranadey Micronutrients Pvt. Ltd.,
8. Before us, the Ld. Counsel for the assessee read out the said written submissions and explained the arguments on the factual matrix relating to this issue. He further mentioned that the AO must not step into the shoes of the assessee when it comes to running of the business and requirement of making payment of commission etc. He also submitted that the recipients of the commission were taxed independently at the maximum marginal rate. Therefore, there is no loss of Revenue on this account.
9. The Ld. DR for the Revenue relied heavily on the order of the AO and submitted for confirming the addition.
10. On hearing both the sides, we have gone through the paper book filed before us. We have also analysed the reasoning given by the CIT(A) in Para 6.2.4 of the order. We find the said para contains the reasoning which led the CIT(A) to the conclusion of granting relief. The said para is extracted as under :
"6.2.4 Apply the ratio of these decisions to the facts of the present case, as stated herein above, it is seen that the commission has been authorized by the Board of Directors keeping in view the active involvement by the directors and the services rendered in improving the profitability of the company. The commission is part of the overall compensation package paid to the directors. Copies of the income-tax return and form 16 of the four directors and Shri S.B. Shirvale, Production Manager to whom commission has been paid, reveal that all of them have disclosed the commission amounts in their respective returns and paid tax at the highest rate. As is evident, dividend paid by the appellant company in the previous year and subsequent year vis-a-vis the year under consideration is not significantly different in order to say that the profits have been paid as commission. So far as the contention of the Assessing Officer that the commission paid is disallowance u/s.40A(2)(a) is concerned, I find that this contention is not supported by any comparable instance to say that the commission payments were unreasonable. Keeping in view all these aspects, the disallowance is held to be not justified and the ground No. 4 is allowed."
11. From the above, we find that the CIT(A) considered the fact that the commission was paid as per the Board Resolution and Authorisation of the Board of Directors. The CIT(A) also held that the services rendered are proportionate to the commission paid by the assessee. She also discussed the fact that recipients of the commission have paid the taxes on the said commission at the highest tax rate. So far as the contention of the AO on the commission issue 5 ITA Nos.137 & 217/PUN/2013 M/s.Ranadey Micronutrients Pvt. Ltd., paid to relatives, she mentioned about not bringing any comparable cases to demonstrate the unreasonableness or excessiveness of the same. Therefore, in our view, the view taken by the CIT(A) on this issue is one of the possible conclusions. The order of the CIT(A) is fair and reasonable on this issue and it does not call for any interference. Accordingly, the grounds raised by the Revenue are dismissed.
12. In the result, the appeal of the Revenue is dismissed. ITA No.137/PUN/2015 (By Assessee) :
13. The only ground raised by the assessee reads as under :
"The Hon'ble CIT(A) erred in upholding the disallowance made by the Assessing Officer of Rs.27,79,911/-. This was in excess of Rs.84,967/- already added by the assessee in the return filed.
14. Relevant facts relating to the above issue include that the assessee has claimed exempt income of Rs.17,78,000/- and disallowed an amount of Rs.84,967/- u/s. 14A r.w.Rule 8D(2)(iv) of the Act. On finding that the assessee made a claim of interest expenditure ignoring the fact that the assessee maintained mixed finances consisting of interest bearing as well as interest free funds, the AO quantified the disallowance under clause 2(ii) of Rule 8D of the I.T. Rules, 1962 and made addition of Rs.27,29,202/-. CIT(A) confirmed the same as per the discussion given in Para 7 of his order. In Para 7.2 the CIT(A) held that the said indirect expenditure have proximity to the exempt income. CIT(A) also discussed the jurisdictional Hon'ble Bombay High Court judgment in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 and held that the same has no merit. No reasons are given for giving such categorical finding considering the facts of the present case. CIT(A) also referred to the Special Bench decision in the case of ACIT Vs. Cheminvest Limited Vs. CIT reported in 124 TTJ 577 before confirming the addition made by the AO.
15. Aggrieved with the order of CIT(A) the assessee is in appeal before us. 6
ITA Nos.137 & 217/PUN/2013 M/s.Ranadey Micronutrients Pvt. Ltd.,
16. Before us, Ld. Counsel for the assessee submitted that the exempt income is only Rs.17,8,000/- whereas the disallowance made by the AO is to the tune of Rs.27,29,202/-. On the faces of it and considering the settled legal propositions, the same is not legally sustainable. Various decisions are in existence for the proposition that disallowance if any u/s.14A of the Act should not exceed the exempt income which form part of the total income. Further, bringing our attention to the copy of balance sheet placed at page 9 of the paper book, Ld. Counsel submitted that the assessee has interest free funds amounting to Rs.5.99 crores (share capital + reserves and surplus) and the investments is only to the tune of Rs.5.43 crores. He also submitted that the interest bearing funds have shown declining trend when compared with the unsecured loans of earlier year (Rs.6.24 crores). He also submitted that the profits for the year works out to Rs.62 lakhs is also available for the purpose of acquiring the said investments. Referring to the increase in investment he submitted that the said increase is also taken care by the current year's profit and interest free loans available in the mixed funds. Considering these facts and relying on the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) as well as the judgment in the case of CIT Vs. HDFC Bank Ltd., 366 ITR 505 Ld. Counsel submitted that disallowance made on account of indirect expenditure u/s.14A r.w. Rule 8D(2) the addition is unsustainable.
17. On the other hand, the Ld. DR for the Revenue submitted that the said interest free funds since utilized towards the assets of the company, it is obvious inference that the assessee diverted the same towards the investments. Therefore, the disallowance is warranted under the said section. He pleaded for confirming the addition made by the AO.
18. We heard both the sides. We find it is obvious inference that assessee has adequate interest free funds and assessee also earned profits in the current 7 ITA Nos.137 & 217/PUN/2013 M/s.Ranadey Micronutrients Pvt. Ltd., year. All these funds are sufficient enough to take care of the investments considering the principle of presumption, laid down by the jurisdictional Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd., (supra). Therefore, in our view, the order of the CIT(A) on this issue requires reversal on this issue. Accordingly, the ground raised by the assessee to the extent of disallowance of Rs.27,29,202/- stands deleted.
19. Regarding the addition of Rs.50,909/- (Rs.1,35,676 - Rs.84,967) the disallowance made under section 36(1)(iii) read with Rule 8D(2) of the I.T. Rules, 1962, we are of the opinion that the same requires to be confirmed in the absence of any specific arguments on this issue. Accordingly, ground raised by the assessee to this extent is partly allowed.
20. In the result, the appeal of the assessee is partly allowed.
21. To sum up, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.
Order pronounced in the open court on this 18th day of October, 2017.
Sd/- Sd/-
(VIKAS AWASTHY) (D. KARUNAKARA RAO)
याियक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 18th October, 2017.
सतीश
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2.
यथ / The Respondent
3. The CIT(A)-4, Pune
4. CIT-4, Pune
5. िवभागीय %ितिनिध, आयकर अपीलीय अिधकरण, "B Bench"
Pune;
6. गाड फाईल / Guard file.
आदेशानुसार
/ BY ORDER,स
स यािपत ित //True Copy//
//True Copy// Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune